Update on SEC Proxy Access No-Action Letters

Status of “Substantial Implementation”: Mid-2016. In our earlier client alerts, SEC Releases Additional No-Action Letters On “Substantial Implementation” Of Shareholder Proxy Access Proposals (March 22, 2016), and SEC Issues New Guidance on Excluding Shareholder Proposals under Rule 14a-8 (November 4, 2015), we summarized a series of no-action letters issued in late 2015 and early 2016 confirming that companies can exclude a proxy access shareholder proposal as “substantially implemented” under Rule 14a-8 if the company has adopted or proposes to adopt a proxy access bylaw with an ownership threshold and a holding period that are the same as those proposed by a shareholder — typically, ownership of 3% of the company’s stock and a holding period of three years.

The series of no-action letters described in our two earlier client alerts outlined a predictable approach for companies that received a shareholder proposal seeking adoption of a proxy access bylaw. Companies could adopt a proxy access bylaw — either in response to the shareholder proposal or preemptively, in advance of a shareholder proposal — and then take the position that the company could exclude a proxy access shareholder proposal from its proxy statement under Rule 14a-8 on grounds that the shareholder proposal had been substantially implemented. As long as the company’s proxy access bylaw ownership threshold and holding period were the same, the company could expect to receive no-action relief from the SEC even if other terms differed substantially from the shareholder’s proposal.

Activists Respond: “Essential Elements” Argument.  To counter the SEC position that substantial implementation requires only that the company has implemented or proposes to implement the essential objective of the shareholder proposal rather than every aspect of the shareholder proposal, shareholder activists have recently begun presenting their proposals in ways intended to indicate that all of the principal terms of the proposal were essential elements of the whole proposal. The activists argued that substantial implementation would require that the company implement each of these elements of the shareholder proposal.

In responses to no-action requests submitted by Cisco Systems, Inc. and WD-40 Company on September 27, 2016, the staff of the Division of Corporation Finance rejected the attempts of the shareholder proponents to redefine the staff’s interpretation of substantial implementation under Rule 14a-8. In light of these no-action letters, companies that receive a proxy access shareholder proposal can continue to expect no-action relief if they have adopted or plan to adopt a proxy access bylaw that incorporates the proponent’s ownership threshold and period.

Proposals to Amend: A Different SEC Response.  The results in Cisco and WD-40 contrast with the SEC staff’s responses to no-action requests from H&R Block, Inc. (July 21, 2016), Microsoft Corporation (September 27, 2016) and Apple Inc. (October 27, 2016). The significant difference in these cases was that the company had received a shareholder proposal seeking to amend the secondary provisions of a “standard” proxy access bylaw that the company had previously adopted. The 2015 proxy access bylaw adopted by each of these companies required 3% ownership for three years, but did not include other provisions included in the earlier shareholder proposal.

The 2016 shareholder proposals to amend the companies’ proxy access bylaw sought to remove restrictions on other provisions in the proxy access bylaw. This included (1) removing limitations on the number of shareholders whose shares can be aggregated to satisfy the 3% ownership threshold, (2) increasing the maximum number of shareholder-nominated directors from 20% or two directors to 25% or two directors and (3) eliminating restrictions on renominating director candidates who have previously received the votes of less than 25% of the company’s shareholders. The H&R Block proposed amendments also provided that loaned securities should be counted toward the 3% ownership threshold.

H&R Block, Microsoft and Apple argued that their 2015 proxy access bylaw provisions, which satisfied the criteria used by the SEC staff to grant no-action relief in cases where shareholders had proposed initial adoption of a proxy access bylaw, satisfied the substantial implementation standard when a shareholder proposed an amendment to an existing proxy access bylaw. In each of these cases, the SEC declined to grant the request for a no-action position on exclusion of the shareholder proposal from company’s proxy statement.

Status of Substantial Implementation: October 2016.  Taken together, the staff’s recent responses in Cisco Systems and WD-40 Company suggest that a company that adopts or proposes to adopt a proxy access bylaw that is consistent with SEC no-action letters issued in late 2015 and 2016 can expect to receive no-action relief on the basis of substantial implementation under Rule 14a-8 if it seeks to exclude a shareholder proposal for initial adoption of a proxy access bylaw from its proxy statement.

On the other hand, based on the SEC’s responses in H&R Block, Microsoft and Apple a company that receives a shareholder proposal seeking to amend an existing proxy access bylaw should not expect to receive no-action relief if it seeks to exclude the shareholder-proposed amendments on the basis of substantial implementation under Rule 14a-8 and has taken no action to amend the relevant portions of its proxy access bylaw, although individual cases will depend on the specific proxy access bylaw provision in question and the specific shareholder-proposed amendment. Having said that, there are currently only three SEC no-action responses dealing with shareholder-proposed amendments to proxy access bylaws, and it is possible that subsequent SEC no-action letters dealing with different facts may provide further guidance on when a company may exclude shareholder proposals to amend an existing proxy access bylaw. It is also unclear how prevalent shareholder proposals to amend existing proxy access bylaws will be during the 2017 proxy season, nor is it possible to predict whether these proposals will attract shareholder support.